Digital Cinema Destinations to Reap Rewards of Disney's Success

With the recent partnership with IMAX Corporation and rapidly growing revenue, Digital Cinema shareholders can expect to be well rewarded in the near future.

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Investors in The Walt Disney Company (NYSE:DIS) have certainly been enjoying the company's success: Shareholders have delighted in 65% appreciation in the share price during the past two years. That is quite an impressive run given that the S&P Depository Receipts (NYSEARCA:SPY) has only appreciated by about 23% over that same period. Disney has been able to sustain its success through strong earnings, diversification of revenues, and box office success. Let's examine that success more closely, and then see how it may impact smaller entertainment companies.

Fundamental Picture

On May 7, 2013, Disney announced its second-quarter earnings. The company managed to deliver blowout results: Total revenue was $10.6 billion, an increase of $1 billion over the same period a year ago. The company generated net income of $1.5 billion, an increase of more than 36% compared to the same quarter last year.

The most impressive part of the earnings report was that Disney managed to grow revenue in each of its five major business divisions. Interactive, consumer products, media networks, studio entertainment, and parks/resorts all generated more revenue compared to the second quarter last year. The most impressive divisions were parks/resorts and studio entertainment, which generated revenue increases of 14% and 13%, respectively.

After examining the earnings report, one aspect really caught my attention. Disney's most impressive business division for the quarter was parks/resorts. In addition to double-digit revenue growth, the segment's operating income soared by over 70% to $383 million. In the earnings report, Disney reported that this was a result of increases in both park attendance and guest spending. Disney also mentioned that increases in guest spending were due to higher average ticket prices, food, beverage, merchandise spending, and daily hotel room charges. So what's interesting is, not only did park attendance increase, but once guests were inside the parks, they were willing to spend more than normal. Obviously that is a media company's dream and bodes very well for the future.

Box Office Success

Due to strong performances at the box office, Disney's studio entertainment division was able to generate revenue of $1.3 billion, a 13% increase over the same period a year ago. The 13% increase was due to strong box office performances from Oz: The Great and Powerful and Wreck-It Ralph. Oz generated a worldwide gross of $491.5 million. Since the movie had a budget of $215 million, that equates to a profit of approximately $276 million. Ralph performed even better. The movie had a worldwide gross of $471.2 million while only having a budget of $165 million. That came out to a profit of nearly $307 million.

Digital Cinema Destinations Is Benefiting From Disney's Success

The success of these movies, and the overall success of Disney, will allow for more creative risks, which will likely lead to greater box office glory. The perfect example is the recent success of Iron Man 3. Despite having a budget of $200 million, the film was able to generate a worldwide gross of $1.2 billion, the fifth highest gross of all time. Disney generated a profit of roughly $1 billion on the film. Movies with this kind of financial return have a positive impact on movie theaters. One company enjoying a piece of that success is Digital Cinema Destinations Corp (NASDAQ:DCIN).

Digital Cinema engages in transforming movie theaters into digital entertainment centers. The company has 18 centers spanning across five states including Arizona, California, Connecticut, New Jersey, Ohio, and Pennsylvania. These entertainment centers allow its customers to actively engage in live and lively events. Customers can enjoy live sports events, concerts, conferences, operas, video games, auctions, and more. One of the most exciting parts of the business is digital conversion. With digital projection, movies arrive by satellite or by paperback book-sized hard drive that's downloaded into a digital projector, one for each auditorium. It takes only minutes to prepare a digital movie for showing, versus one to two hours to spool six reels of film onto a platter, thread it into a projector, then respool it for return shipment at the end of the run. In Digital Cinema theaters, customers will be completely immersed in the experience. They will be able to text back questions and comments, sing along, host tailgate parties outside, and even perform skits to accompany the program. This is truly a one-of-a-kind experience that has the potential to revolutionize the theater industry.

Digital Cinema has already turned itself into one of the major players in the theater industry through hard work, financial management, and visionary leadership. Over the past four quarters, the company has been able to systematically grow its revenues. For the period ended June 29, 2012, the company generated $3.8 million in revenue; for the period ended September 29, 2012, it generated $4.3 million in revenue; for the quarter at year end 2012, it generated $6.9 million in revenue; and for the most recent quarter, Digital Cinema generated $8.8 million, an increase of 27.5% from the prior quarter and a ninefold increase year-over-year.

In addition to what the company has already achieved, management is pursuing an aggressive growth strategy which has the potential to begin adding shareholder value rapidly. Digital Cinema plans to opportunistically expand by identifying and acquiring solid performing theaters in accretive transactions at reasonable cash flow multiples (5-6x earnings, including initial capital expenditures). Since April 2012, the company has acquired 15 theaters and 169 screens. The long-term goal is to reach 100 theaters and 1,000 screens across the country in order to create a national circuit where consumers of entertainment can interact with every form of content owner. One of the differentiators for Digital Cinema is that it plans to generate 20% of total box office receipts from alternative content, which will replace underperforming Hollywood titles on screen. This alternative programming is geared to help improve attendance metrics with ticket prices marked up by 50%. This will help continue the company's strategic growth plan well into the future and help unlock significant shareholder value.

Earlier this month, Digital Cinema announced that it would partner with IMAX to open an IMAX Corporation (USA) (NYSE:IMAX) screen at its multiplex center in Surprise, Arizona. Now Digital Cinema will be able to begin enjoying some of the success that IMAX has been enjoying over the past several years.

Now while the future certainly looks bright, investors must also consider the risks of investing in entertainment companies. Typically entertainment allowances shrink during times of economic hardship. And while that hasn't been the case of late, investors must understand that consumers may not spend the same amount on entertainment when money is harder to come by. I don't anticipate this happening anytime soon, but it is a risk that investors must be aware of.

Conclusion

Disney has had an impressive run over the past couple of years. The company has steadily increased its earnings and revenue by executing a specific and targeted growth plan. The strength in the underlying business has allowed the company to increase its budget for creative projects such as high production movies. The recent success of these movies has been felt not only by Disney shareholders, but by shareholders of smaller entertainment companies such as Digital Cinema Destinations. With the recent partnership with IMAX and rapidly growing revenue, Digital Cinema shareholders can expect to be well rewarded in the near future.

Editor's note: TM Meyer is a former equity derivatives market maker based out of Chicago. He currently manages his own personal portfolio using a combination of fundamental analysis, technical analysis, and event driven catalysts.